Now we turn to consider some aspects of the wage-setting process, which is in
part highly decentralized and in part generally centralized in Japan and highly decentralized in the United States. In Japan, wage setting is finalized at the level of the
firm, either under collective bargaining between autonomous enterprise-based
unions and firms or unilaterally by management but with guidance and coordination emanating from an annual economywide process known as Shunto. In this
chapter, after noting how certain characteristics of wage performance in the economy at large tend to interact with the SET system of labor management within the
enterprise, we examine the wage-determining behavior of large Japanese firms, the
structure and objectives of trade unionism, and the bargaining power of Japanese
enterprise unions.

SET and Economic Outcomes

In Chapter 4, we pointed out how the firm's internal wage structures have either
supported or conformed to essential features of its SET system. In Japan tolerance
of large individual differences in pay in the work place (differences that result from
steep age-earnings profiles) has made it possible to combine career incentive properties of SET with effective teamwork in small groups. Moreover, by increasing experienced employees' fear of dismissal and reluctance to quit ( Koshiro, 1983c),
steep profiles strengthen the incentives for their employers to invest in employee

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